A.M. Best Co. has downgraded the financial strength rating to B++ (Good) from A- (Excellent) and issuer credit rating to "bbb+" from "a-" of Sterling Life Insurance Company (Sterling) (Chicago, IL).

The outlook for both ratings is stable. Sterling is owned by Munich Health North America, Inc. (MHNA), the U.S.-based subsidiary of the ultimate parent, Munich Reinsurance Company (Munich Re).

The downgrading of the ratings for Sterling reflects its sizeable underwriting and operating losses in 2011, which are projected to continue through 2012. The rating downgrades also are reflective of the company's weaker than expected earnings that primarily resulted from an intentional decline in the Medicare Advantage Private Fee For Service (PFFS) business segment where the medical loss ratio increased by over 1,500 basis points driven by lower reimbursement, increased utilization and declining premiums. In addition, the administrative expense ratio deteriorated, following over a 50 percent reduction in direct premiums written over the last four years as Sterling phases out of the PFFS product. Going forward, Sterling plans to further reduce its exposure to Medicare Advantage products and concentrate on its growing Medicare supplement business and other supplemental products.

Somewhat offsetting these negative rating factors are Sterling's good level of risk-based capitalization and the support of Munich Re. Sterling, along with the other MHNA's Medicare subsidiary, Windsor Health Plan, Inc., is part of Munich Re's strategy to expand into the Medicare market.

A.M. Best believes that the company is well positioned at its current rating level.

Factors that may lead to negative rating actions include Sterling having a higher than anticipated future operating losses and capitalization decline, lack of parental support or a decline in its strategic role within the overall organization.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: "Risk Management and the Rating Process for Insurance Companies"; "Understanding BCAR for Life/Health Insurers"; and "Rating Members of Insurance Groups." Best's Credit Rating Methodology can be found at ambest.com/ratings/methodology.

A.M. Best Company is an insurance rating and information source.

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